While the success of a merger or acquisition may be best determined over a long time horizon of several years, investors tend to have a shorter-term view of what constitutes success or failure in M&A. Corporations are held to be only as successful as their latest quarterly results and many investors base their opinions off analysts' reports and forecasts. Given the weight accorded to these reports by investors, corporations often focus on quarterly results in lieu of longer-term performance. One result is that the longer-term planning required to extract the most value from an M&A transaction may be abandoned in favour of the short-term decisions required to beat analysts' next quarterly forecast.
In response to this approach, corporate governance experts in Canada have advocated for a move to lengthier financial reporting periods. By giving directors more time in between reports, corporate decision makers would be able to take a longer view of operations and become less beholden to "quarterly capitalism" under the current system.
While no securities regulator in Canada has yet to make this change, the Financial Conduct Authority in the UK has begun to allow reporting corporations to forgo issuing first and third quarter reports. To date, only four of the FTSE 100 constituents have adopted this reporting structure. According to the Financial Times, one these corporations, National Grid, will also issue updates as necessary outside of the biannual reports. Unilever also made headlines in 2009 when it decided to stop providing quarterly guidance to investors, citing the need to reduce "short-termism".
These goals have also been echoed by Dominic Barton, McKinsey's global managing director, and Mark Wiseman, president and CEO of Canada Pension Plan Investment Board. In the article "Focusing capital on the long term", the author's state that the majority of board members and executives feel pressure to demonstrate short-term financial performance while also believing that using a longer decision making horizon would improve corporate performance.
While Canadian publicly traded corporations may still find it difficult to avoid the pressures of quarterly reporting, private companies should take note of the reasoning behind such moves. Since they are not subject to quarterly reports, private corporations can more easily take advantage of long-term strategic planning. This is especially valuable in the context of mergers and acquisitions where the benefits may not be fully realized until well after a transactions has closed.
The author would like to thank Mark Bissegger, summer student, for his assistance in preparing this legal update.
Norton Rose Fulbright Canada LLP
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